Living together in later life

More couples are choosing to cohabit rather than marry in later life, but there are financial implications in doing so

Many older people are rejecting the idea of marrying or entering a civil partnership in favour of living with their romantic partners.

People over pension age are the fastest growing group of cohabitees, according to analysis by Royal London, with more than 300,000 people aged over 65 living together rather than getting married. The vast majority have previously been married or in a civil partnership, and when that marriage or partnership has ended in divorce or widowhood, they have decided not to marry or enter a civil partnership again.

While it is fantastic that people are meeting new partners in later life, Helen Morrissey, Personal Finance Specialist at Royal London, thinks there needs to be more awareness of the financial implications of choosing to live with someone rather than getting married.

“There is a clear trend towards couples in later life choosing to cohabit rather than to marry, yet many may be unaware of the financial implications of doing so,” she says. “There needs to be much more awareness of these issues so that cohabiting couples are aware of potential difficulties and can plan appropriately.”

Here we show three rights enjoyed by married and civil partnership couples, but not by cohabitees.

Inheritance tax

Everyone has an inheritance tax allowance known as the ‘nil rate band’, which allows them to pass money and other assets up to this value to any beneficiary they choose. Assets above the nil rate band, currently £325,000, are usually taxed at the rate of 40%. But someone who is married or in a civil partnership can:

Pass part or all of their wealth to the surviving spouse, or civil partner, completely free of inheritance tax. Cohabiting couples have no legal right to automatically inherit their partners’ property so it is important that wills are made and kept up to date. If an estate is passed to a cohabiting partner, the estate may still be liable to inheritance tax. Helen says: “Homes comprise a large part of many people’s estates, and given the rapid rise in house prices over the last 20 years, many cohabiting couples could find themselves facing a hefty tax charge.”

Transfer any unused portion of their £325,000 nil rate band to their spouse or civil partner. So if a husband dies and passes all his estate to his wife, using none of his inheritance tax allowance, the wife can use all of her husband’s unused allowance plus her own. Based on the current allowance of £325,000, this means she could pass on untaxed assets worth £650,000 to beneficiaries. The rules apply to survivors of a marriage who die on or after 9 October 2007, regardless of when the first spouse died. For civil partners, the first death must have occurred on or after 5 December 2005, the date when the Civil Partnership Act became law in the UK.

Transfer any unused portion of the recently introduced residential nil rate band to their spouse or civil partner upon death. The residential nil rate band is an additional inheritance tax allowance when a primary residence is passed upon death to a direct descendant. This new allowance is worth £100,000, rising to £175,000 by the 2020–2021 tax year and so will be worth up to £350,000 to the surviving spouse or civil partner.

“The fact married couples and civil partners can transfer these nil rate bands to each other means that by 2020 they can benefit from an overall inheritance tax nil rate band of £1m – something cohabiting couples cannot benefit from,” Helen says.

Income tax

The old Married Couple’s Allowance applies to couples where one or both spouses or civil partners were born before 6 April 1935. The allowance can reduce the tax bill by up to a maximum of £844.50 in the 2017–2018 tax year.

The new Marriage Allowance applies to married and civil partnership couples where both partners were born on or after 6 April 1935. It enables a spouse or civil partner to transfer any unused personal allowance to his or her spouse or civil partner. To qualify, the lower earner must have an income of less than £11,500 while the higher earner must be a basic rate taxpayer. This can be worth up to £230 per year in the 2017–2018 tax year, and can be backdated to include any tax year since 5 April 2015, for which the couple is eligible.

State pension

There are two types of state pension in operation – the old-style basic state pension and the new state pension.

Many people who receive the old-style basic state pension, particularly women who paid the ‘married woman’s stamp’, do not benefit from the full state pension. By using their deceased spouse or partner’s National Insurance Contribution record instead of their own, they may be able to increase the amount of pension they receive.

They may also be entitled to inherit between 50% and 100% of the state earnings related pension (SERPS) of their late partner, depending on the date of birth of that partner.

Under the new system, pension entitlement is built on the individual’s National Insurance record and not that of their spouse or partner.

In terms of inheritance rights, new state pension rights up to the flat rate of £159.55 are not inheritable. However, some people were expecting to receive a higher state pension than this if they had accumulated a significant amount of SERPs. In this case, half of any amount in excess of £159.55 – known as the ‘protected payment’ – can be inherited.